Tuesday, March 11, 2014

In the previous post, I observed how newly-built single-family housing in the Mexican border city of Matamoros (and in fact in most Mexican cities) is both much smaller in size and far cheaper, even adjusting for lower incomes, than almost any housing in the United States outside of Detroit.

New Matamoros rowhouses. (Google Maps).

This is partially due to the underdevelopment of the mortgage banking industry in Mexico, with the result that six percent of all homes in the country are financed with mortgages. The vast majority of homes are either inherited, bought with cash, or else are self-built on cheap vacant land, although informal lending systems among friends and family members no doubt lie behind many of these cash purchases. In the absence of debt-financed home consumption, most new homes must be very modest to match the limited purchasing power of potential buyers.

Although one might expect this lack of financing to impair individual property ownership, a surprising 80 percent of Mexicans own their own homes. This compares to a rate of only 65 percent in the United States, where 70 percent of homes are encumbered with mortgages and only 1 in 10 buyers pays in cash (at least, until the recent surge in buying by institutional investors). As I pointed out in a previous post, the homeownership rate in the US has actually been more or less stagnant since the mid-1960s in spite of extraordinary efforts to expand the availability of credit.

I think there is something else at work here, though, beyond the influence of two very different lending environments, and it relates back to the modest size of houses observed in Mexican cities. It's been a point often noted that the average size of new American homes has been steadily increasing since 1950 even as household sizes have fallen. Home sizes and household sizes have diverged so sharply, in fact, that a major structural mismatch has emerged throughout the US housing market, as shown below (charting percentages of all US housing units and all US households):

Data from 2012 ACS three-year estimates.

Although over 60% of US households consist of just one or two people, only 13% of housing units are studios or have one bedroom. Moreover, we know that very few single-family homes of the type produced over the past few decades years have been studios or one bedrooms (or even two bedrooms), making it likely that most of these units are apartment rentals. This can be confirmed through housing data on tenure status, which show that studio and one bedroom units are overwhelmingly renter-occupied:

Data from 2012 ACS five-year estimates.

Homeownership in the United States, evidently, is very much a large or larger-home phenomenon (assuming that number of bedrooms is a reasonable proxy for housing unit size). When owned units are looked at in isolation, this fact becomes even more startling:

Data from 2012 ACS five-year estimates.

In essence, new single-family detached or attached homes intended for just one or two people, of the size built in mass quantities in Mexico, virtually do not exist in the United States. A Zillow or Trulia search in most any major American city will quickly show that this type of home largely ceased being built after the late 1950s, which, perhaps not entirely coincidentally, is about the same time that the homeownership rate began to level off. Today, only about one in ten new single-family homes have two or less bedrooms. Although this might be understandable if the decline had been offset by significant increases in the proportion of small units in multifamily buildings, it turns out that this has not been the case.

To what extent these patterns are an expression of consumer preferences, market forces, financial and tax incentives and/or land use restrictions (such as minimum lot or square
footage restrictions) is unclear, although there is evidence that square
footage restrictions generally seem to have appeared at around the same
time as smaller homes ceased being built in large numbers and to have
increased in restrictiveness thereafter.* Very small houses, and very
small lots, have in typical American zoning fashion
been segregated and stigmatized in so-called trailer parks (note
that Matamoros, despite being poorer than any American city, apparently has no trailer parks).

Whatever the explanation, the effect must be to impede further increases in homeownership. As the country has undergone a long-term reduction in household size, the market has produced fewer and fewer for-sale options sized for small households. The options that remain are not ideal. One can either buy a home that is far larger and more expensive than one needs or enter a competitive rental market for legally restricted multifamily supply (large swaths of American cities, due to restrictive zoning, have few or no apartments for sale at all). An additional option — subverting late 20th century cultural norms* by renting out rooms within a single-family dwelling larger than needed for just one or two occupants — invariably raises the hackles of incumbent homeowners (as seen in the occupancy limit controversy in Austin and many other cities).

These trends have been noted countless times before, in particular by Christopher Leinberger, while Nathan Lewis has been adamant about the need for an increase in production of much smaller homes (including multifamily construction) and, just as importantly, the availability of much smaller building lots. Americans seem to have some difficulty conceptualizing separately-owned very small homes on small lots, though, and even when structures of this size are recognized as meeting an important market need, they are typically imagined as mere accessories to "proper" single family homes, not least by the New Urbanists themselves. Still, that is an approach that tries make something better out of the traditional American pattern of building a series of small houses (on their own separate street network!) just for cars to live in:

The Tiny House movement, which partly emerged in reaction to the financial burden imposed by large homes, has no such hang-ups, though the emphasis seems to be almost exclusively on shrinking the size of the home, rather than the size of the lot, and is often associated with rural environments (though certainlynot always, and also see here). But large houses seem to be a natural fit for oversized lots and overbuilt infrastructure, as Nathan Lewis has noted.

What would be a reasonable price goal, within the context of the dominant single-family detached form, for housing cost using both small homes and small lots? Nathan, in his writings on this subject, aims for $50,000, which, when adjusted for higher American incomes, would be roughly comparable to the greenfield homes of Matamoros. Nick Derome estimated $170,000 for very small-lot homes in surburban Toronto in comments on the previous post. For even the highest cost towns in Fairfield County, Connecticut, based on land prices, 1,000 sq. ft. homes of less than $200,000 appear financially (if not politically) feasible. Going almost anywhere else from such a high cost location, prices should drop significantly.

Even within certain parts of ultra-expensive Fairfield County itself, the few manufactured and/or mobile homes available for sale (the only type of contemporary single-family detached housing that, with its special zoning designation, has anywhere close to the lot sizes found in Matamoros) tend to run around $60,000 for a 1,000 sq. ft., two-bedroom home. Higher quality architecture and construction — such as that found on the Katrina cottagesor better — could surely be provided at only somewhat greater expense. A major challenge, it would seem, is not simply surmounting legal barriers, but reaching an understanding that small homes are not just for poor families, but for small families and others too.

*In striking down a Connecticut town's law fixing the minimum home size at 1,300 square feet (under challenge by a builder attempting to construct a 1,000 sq. ft. modular home), the Connecticut Supreme Court noted "the significant increase of the minimum floor area
requirements over the years since 1955 when [the town] had its first
regulation controlling minimum floor area requirements. At that time, the
minimum floor area requirements were only 750 square feet for a one-story house... ." Builders Service Corporation v. Planning & Zoning Commission (1988). Similar New Jersey ordinances dated as early as 1949.

*Consider the connotations of the very term "single-family dwelling" and
what it implies about the identity of the inhabitants of such a
dwelling. However, such creative use of single-family dwellings used to
be very common, legal and accepted as more or less ordinary (for an
example, browse the appendix of the 1950 Housing Census, which describes a bewildering array of housing arrangements within a single home that enumerators might encounter).